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MSC Industrial Direct seeks to manage for the long term

Erik Gershwind, seen on Sept. 19, 2016, the president and chief executive of MSC Industrial Direct Co., Long Island's second-largest public company by annual revenue, says the company thrived after the 2008 recession by building staff and taking advantage of the economic recovery. Photo Credit: Barry Sloan

MSC Industrial Direct Co., the second-largest public company on Long Island by revenue, is rare among publicly traded companies. It stands up to Wall Street.

When stock analysts pressed the Melville-based distributor of industrial tools and supplies on whether it would cut jobs during the recession in 2008 and 2009, executives at MSC refused. The company added staff in an effort to position itself for an economic recovery.

That bet paid off. In its fiscal year 2011, two years after the recession ended, the company posted a 19.5 percent sales increase.

“We came out of that downturn screaming,” said Erik Gershwind, 45, chief executive since 2013, president since 2011, and a senior executive during the recession. “Morale was good. We bounced back.”

Now 75-year-old MSC is once again relying on a long-term approach, this time to help it weather a slowdown in North American manufacturing, where MSC derives an estimated 70 percent of its sales. It is patiently growing market share in part by helping manufacturers keep down inventory costs. It’s reining in expenses.

But MSC is not cutting its estimated 6,500 employees, including 400 on Long Island. It is banking again that sales will jump when manufacturing recovers.

MSC “is a good company working through a pretty awful part of the industrial business cycle,” said Chris Dankert, a senior research analyst/industrial distribution who follows MSC at Longbow Research, an Ohio-based securities firm.

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MSC operates in what is known as the metalworking, maintenance, repair and operations segment of manufacturing, selling the tools and supplies that help North American manufacturers keep their businesses operating. It offers more than a million different items to manufacturers, including cordless screwdrivers, pipe-threading machines, adhesive bandages, 3-D printers, light bulbs, padlocks and self-sealing hex bolts.

It had 2015 revenue of $2.9 billion, trailing only Melville-based Henry Schein, with $10.6 billion, among local public companies. MSC’s net income that year dipped 2 percent to $231.3 million.

Shares of the company closed Friday at $72, up almost 28 percent this year. MSC debuted as a public company on the New York Stock Exchange in 1995, with an initial price of $19 a share.

Gershwind’s grandfather, Sidney Jacobson, started MSC’s predecessor, Sid Tool Co., in 1941, selling metal-cutting tools from the trunk of his car in Manhattan’s Little Italy. The company later added industrial staples such as safety and electrical supplies.

The company has a “co-headquarters” in Davidson, North Carolina — announced in 2012 when it received state and local tax incentives — where it is close to a pool of workers with industrial experience. Gershwind makes his office in Melville.

The founding family owns 25 percent of the stock, and has a voting interest well above 50 percent because of its ownership of Class B stock with 10 votes per share, said Gershwind, who is the fourth CEO in the company’s history. The company’s third and only nonfamily-member CEO, David Sandler, died in July after serving at the helm from 2005 to 2012. Gershwind succeeded him on Jan. 1, 2013.

“One of the benefits of the family influence here is that we are different from the typical public company,” he said. “For that reason we do tend to take a longer-term perspective.”

“There may be Wall Street analysts who don’t like that because they want us to show more profit in a given year, whereas we are investing in the future,” Gershwind said.

Analysts have noticed. “It is very abundantly clear that when he [Gershwind] is making investment and strategic decisions he seems to have a bias toward a 10-year horizon versus the 12-month horizon that is a little more consistent among the public companies,” said Kwame Webb, a senior equity analyst at Morningstar Investment Services, a Chicago financial research firm.

The manufacturing sector’s current slump was brought on by a strong U.S. dollar, which makes U.S. exports more expensive abroad, and a global economic slowdown.

“Manufacturing is not booming as much as it was because China’s not doing as well, Europe’s not doing as well,” said Arthur Wheaton, a manufacturing expert and member of the faculty at Cornell University.

Locally, the Federal Reserve Bank of New York estimated this month that manufacturing activity in the state shrank in September for the second consecutive month.

Because of slack demand, U.S. manufacturers need fewer tools and supplies.

The effect on MSC, one of the largest industrial tool and supply distributors in the world, has been striking. After MSC bought Ohio-based Barnes Distribution in 2013 for $550 million — which gave the company low-cost, high-margin products such as fuses and fittings, inventory-cost management skills and its first presence in Canadian markets — it predicted its overall sales would climb to $4 billion this year. Instead, sales in fiscal 2016, which ended in August, aren’t expected to budge much from 2015’s $2.9 billion when they’re reported in early November.

“The industrial economy has been radically different” from what the company expected, Gershwind said.

MSC’s opportunity in this tough environment, Dankert said, is that the fragmented world of tool and supply distributors offers MSC a chance to gain market share.

Companies in the United States spend about $140 billion on maintenance, repair and operations annually, which is divvied up among 150,000 distributors, Dankert said. The top 50, including MSC, control just 30 percent.

MSC’s opportunities are particularly promising in the metalworking end of the business, where the company dominates in the sale of tools that help cut, bend and shape metal. MSC can “leverage its cutting-tool knowledge and gain share from smaller distributors with less operating leverage as well as from large public peers that don’t carry the same level of technical cutting-tool expertise,” Dankert said.

MSC’s inventory-management skill attracts customers because it assists them in paring their inventories. About two years ago, the system helped a customer slash inventory costs by $1.5 million when it changed over to MSC’s vending machines with parts that MSC specialists restock as the customer needs them, Gershwind said.

“So that is cash that the customer is saving because of this inventory-management system,” said Gershwind, a Wharton School and a Harvard Law School graduate.

Keeping a lid on expenses also has helped the company in the tight current environment. Gershwind said that a “grass roots effort” to think smarter about spending money has played a big part in cutting expenses. Suggestions included automating billing procedures and using video conferencing equipment to reduce travel expenses.

He credits chief financial officer Rustom Jilla, 55, who joined the company last year, for that grass-roots approach.

One cost-cutting strategy the company views as a last resort, Gershwind said, is layoffs. To management, cutting jobs is counterproductive and runs contrary to the views of Gershwind’s grandfather, a philanthropist who believed that employees are key to a company’s success. Gershwind said the company would have lost ground if it had laid off workers during the recession.

“If we lay all these people off and they are out of jobs, and in a year or two years whenever things come back, we’re going to have to hire back,” he said. “And our customers are going to want quick service and we’re going to hire back people that don’t know our culture, don’t know our systems and our customers.”

Gershwind said that U.S. manufacturing will bounce back, aided in part by low energy costs. And he predicted that domestic companies such as MSC will benefit as customers demand speedier delivery of parts.

“Over the long run, U.S. manufacturing is a pretty good place to be,” he said.